## fd-sept26-online

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### ASEAN: 4.5 percent annually, among the fastest
- Growth, investment, and FDI
  - "ASEAN grew at 4.5 percent annually, among the fastest growth rates globally."
  - Foreign investment reached "$244 billion in 2025, climbing 10 percent."
  - Manufacturing investment "jumped by nearly 50 percent."
  - "ASEAN’s share of global FDI inflows has tripled since 2005."
  - "ASEAN’s share of world goods exports has nearly caught up to the United States, even as China’s share has more than doubled."
- Trade patterns and internal market integration
  - Only "about 22 percent of what ASEAN exports goes to its own members," compared with "61 percent" within the European Union.
  - "What does cross internal borders is mostly intermediate goods, the parts and components feeding factories that sell to the rest of the world."
  - "ASEAN has built a shared production line, but not a shared market."
  - "Less than 30 percent of final goods exports is traded within the region, half the share in Europe and North America."
  - ASEAN is "highly open to global trade, with volumes exceeding its economic output," yet "trade within ASEAN accounts for less than a quarter of total trade—far below other regional blocs."
- Potential gains from deeper regional integration
  - IMF estimates: "dismantling the region’s nontariff barriers could raise ASEAN’s output by 4.3 percent over the long run, equivalent to adding over a third of Malaysia’s economy."
  - Chart descriptor: "cumulative rise in real GDP for ASEAN over the long run from deeper regional integration 4.3%."
  - Emphasis: "No region in Asia has more to gain from deeper integration."
- Structural challenges constraining growth
  - Productivity
    - "Productivity gains are slowing, because industrialization pays fewer dividends."
    - "Productivity growth—the ultimate driver of sustained income gains—has slowed across much of Asia since the global financial crisis."
    - "While investment remains high, returns to capital have declined, reflecting rising misallocation and diminishing efficiency."
    - Financial systems "remain heavily bank-centric," favoring large incumbents including state-owned enterprises over younger, faster-growing firms.
  - Demographics
    - Fertility fell "from about 6 children per woman to about 1.6 today" since the 1960s.
    - Life expectancy rose "from roughly 50 years to the mid-70s."
    - "By 2050, one in five people in Asia will be 65 or older—double today’s share."
    - The region is "not aging uniformly" (rapidly aging: Japan, Korea, China; middle group: India, Malaysia, Vietnam; younger: Nepal, the Philippines).
  - Trade fragmentation and geoeconomic shifts
    - "Geoeconomic fragmentation is reshaping trade patterns, supply chains, and investment flows."
    - Policy responses include "more active industrial policies," which may "distort incentives or further fragment markets."
  - Energy and technology risks
    - "High levels of energy intensity and dependence on energy imports add another layer of vulnerability."
    - "Artificial intelligence and other rapid technological advances ... also risk disrupting jobs and widening divides."
- Policy directions and priorities
  - Trade and regional integration
    - "Dismantling the region’s nontariff barriers" to raise output by "4.3 percent over the long run."
    - "More comprehensive, enforceable regional agreements—covering services, digital trade, competition policy, and standards—can lower trade costs and improve access, thereby boosting productivity."
    - Build a "deeper home market" to reduce exposure to outside demand shocks.
  - Finance and investment allocation
    - "Sustaining growth will require shifting from more to better investment and strengthening financial systems so that capital flows to its most productive uses."
    - "Asia can pivot toward boosting productivity rather than capital accumulation by improving financial access, deepening capital markets, and expanding venture finance."
    - "Capital flows to more productive recipients when it’s priced and allocated on market terms."
  - Labor, skills, and demographics
    - Raise "labor participation among women and older people."
    - Invest in "skills" and facilitate mobility.
    - "Migration, both within and across borders, can also help if well managed."
  - Technological adaptation and inclusion
    - Leverage "AI and other technologies" to offset labor shortages in aging economies while managing distributional risks.

### Asia-wide: 1.8 percent in the long run—equivalent to adding
- Growth gains from deeper regional integration
  - Headline: "1.8 percent in the long run—equivalent to adding an economy larger than Thailand’s today."
  - Southeast Asia stands to gain the most among subregions.
  - Additional gains from coordinated reforms would be larger than unilateral action.
  - Trade integration could lift growth further by about "0.1 to 0.3 percentage point."
- Demographic shift and heterogeneity
  - Working-age defined as "15–64."
  - A shrinking population is expected to subtract "about 0.3 percentage point from growth annually by 2050."
- Technology, AI, and digitalization as growth drivers
  - "About 90 percent of the population online" (Asia).
  - "Asia accounts for more than two-thirds of global innovation in digital technologies."
  - AI potential: in economies with strong fundamentals, AI could raise growth "by up to 1 percentage point per year relative to a no-AI baseline (model-based analysis)."
  - Productivity gains from AI and related technologies could add "0.2 to 1 percentage point to growth."
  - Digitalization complements reforms by increasing efficiency of financial transactions and digitalizing tax and payment systems, which can raise government revenues and improve public spending transparency.
  - India example: modern services account for "about a quarter of exports"; digital payments move "trillions of dollars each year."
- Distributional and labor-market implications of AI
  - Benefits of AI will be uneven: early adopters with higher-skilled workers, greater capital intensity, and better institutional capacity gain most.
  - Within countries, AI may intensify wage and opportunity gaps.
  - Policy responses: investment in education, digital infrastructure, innovation; retraining and support for worker mobility; redistributive policies to share AI gains and support displaced workers.
- Energy security and near-term macroeconomic risks
  - Energy security is a near-term macroeconomic challenge, especially in Southeast Asia.
  - Drivers of rising energy demand: Vietnam’s industrial expansion, Singapore’s data centers, Indonesia’s urbanization.
  - Countries pivoting: Vietnam scaling up renewables; Indonesia exploring a shift away from coal; the Philippines diversifying away from imported energy; Thailand prioritizing the energy transition.
  - Falling renewables costs and advances in storage ease the transition even as digitalization and AI raise electricity demand.
  - Policy challenge: move fast without compromising affordability or reliability; payoff includes greater energy security and resilience.
- Structural transformation toward services and domestic demand
  - Manufacturing has peaked as a share of output in many economies; services—particularly finance, information technology, and business process outsourcing—drive growth.
  - Rebalancing toward domestic demand should support resilience amid a fragmented global economy.
- Fiscal and revenue considerations
  - Unlocking reform potential requires fiscal space to manage transition costs, offset revenue losses from tariff reductions, and invest in complementing reforms.
  - Tax revenue in much of Asia, notably many ASEAN economies, is low relative to peers; raising more domestic revenue will be critical.
- Policy recommendations and priorities
  - Sustain growth through policies that ensure a continued shift toward productivity, inclusion, and sustainability: strengthen skills, institutions, and technology use.
  - Create fiscal space to manage transition costs and finance complementary investments.
  - Invest in digital infrastructure, build digital platforms (identity and payment systems), strengthen regulation to ensure trust, and expand digital literacy.
  - Design labor policies for retraining and worker mobility; implement redistributive policies to share gains and protect displaced workers.
  - Accelerate renewables and storage deployment while safeguarding affordability and reliability.
  - Coordinate reforms across countries where possible to magnify gains from integration.
- Key statistics preserved
  - "1.8 percent in the long run—equivalent to adding an economy larger than Thailand’s today."
  - Working-age = "15–64."
  - "About 90 percent of the population online" (Asia).
  - "Asia accounts for more than two-thirds of global innovation in digital technologies."
  - AI could raise growth "by up to 1 percentage point per year relative to a no-AI baseline (in better-prepared economies such as Japan and Korea)."
  - Shrinking population expected to subtract "about 0.3 percentage point from growth annually by 2050."
  - Productivity gains from AI and related technologies could add "0.2 to 1 percentage point."
  - Additional gains from trade integration could lift growth by about "0.1 to 0.3 percentage point."
  - Intra-ASEAN trade amounts to "25 percent of GDP"; trade with the rest of the world fluctuates "between 80 and 90 percent."

### China: 18.7 percent in 2019 to 22.3 percent in 2025; electric and industrial upgrading
- Trade surplus and sectoral drivers
  - China’s trade share rose "from 18.7 percent in 2019 to 22.3 percent in 2025."
  - Electric vehicles, batteries, solar products, and chemicals accounted for "about 70 percent of that increase."
  - Some of the shift reflects China’s upgrading; some reflects conditions in Europe (higher energy costs weakened energy-intensive industries; green transition raised demand for equipment China supplies).
- External recycling of surplus
  - Historically much surplus was invested in US Treasurys and other dollar assets.
  - Increasingly surplus savings are invested in factories and infrastructure abroad, creating jobs and strengthening local supply chains.
  - 2025 examples cited: Alibaba Cloud opened a third data center in Malaysia; BYD moved ahead with its first European passenger car plant in Hungary; Haier-owned GE Appliances announced a "$3 billion expansion" of its US manufacturing footprint.
  - Geopolitical backlash: tariffs and other restrictions have been provoked among trading partners; success poses risks to China’s growth model.
- Rebalancing at home: the third transition and macro policy
  - External recycling can ease pressure but cannot substitute for rebalancing toward higher household incomes and services-led consumption.
  - Risks of failing to rebalance: a K-shaped transformation, deeper inequality, and labor displacement from digital and AI transitions.
  - Key domestic statistics
    - In 2025, China’s automobile industry generated "more than RMB 11 trillion—exceeding property sales, which fell to about RMB 8 trillion from RMB 18 trillion in 2021."
    - Automobile manufacturing contributed "only about 1.6 percent of GDP," far less than real estate’s "6 percent."
    - Household consumption rose "from about 35 percent of GDP in 2010 to 40 percent in 2024," still below the "53 percent average for middle-income countries."
- Policy measures recommended
  - Stronger social protection and public services: higher spending on pensions, health care, childcare, education, and unemployment insurance to reduce precautionary saving and bolster consumption.
  - Repair balance sheets: debt restructuring, especially at local government and property-value-chain firm levels, to restore credit availability.
  - More productive investment abroad to recycle surplus into job-creating foreign factories and infrastructure.
- China’s deeper reform proposition
  - China’s advantages in demand and supply position it well for a green and digital transition that rewards high volume and resilience amid geopolitical fragmentation.
  - The article attributes China’s record trade surplus more to industrial advantages than to subsidies.
  - Deeper reform needed: stronger household incomes, better social protection, more services consumption, and more productive investment abroad for a durable, balanced transition.

### India: From Goldilocks narrative to structural constraints
- Context and recent headwinds
  - A year earlier India enjoyed robust growth and macro stability and had become the world’s fifth-largest economy; by 2025 headwinds included a steep rise in oil prices, cooled growth momentum, reemerging inflationary pressures, rupee depreciation, capital outflows, stalled private investment, and a slip to sixth place in global GDP ranking.
- India’s three structural vulnerabilities
  - Missing private investment
    - Overall investment rate around "33 percent of GDP."
    - Private corporate investment stuck at "about 11 percent of GDP," far below its historical peak of "nearly 17 percent in 2008."
    - Public capital expenditure has driven recent growth while private investment lags.
  - Jobs and productivity mismatch
    - Agriculture contributes "just about 15 percent of GDP" but accounts for "nearly half the total workforce."
    - Manufacturing responsible for "about 13 percent of GDP" and absorbs "about 11 percent of workers."
    - High-value modern sector generates "roughly 15 percent of GDP" while directly employing "a minuscule 3 percent of the workforce."
    - India imports "over $100 billion in annual goods from China"—partial substitution could create millions of jobs if firms scale.
  - Fragmented market and K-shaped outcomes
    - Over "85 percent of the workforce is in informal employment."
    - Real rural wage growth flat or negative when adjusted for persistent food inflation.
    - Consumer market is fragmented: premium goods demand outpaces entry-level mass-market staples.
  - Innovation deficit
    - India’s total spending on R&D remains "roughly 0.7 percent of GDP," while advanced innovation economies spend "3 percent of GDP or more."
    - Demographics: median age "roughly 28" (compared with nearly 40 in China and over 44 in Europe).
- Policy priorities for India
  - Revive private investment by creating a more predictable regulatory environment, lowering compliance burdens, and raising expectations for returns on long-term capital.
  - Accelerate labor shift from low-productivity agriculture to labor-intensive manufacturing and modern services through investment in skills, logistics, and urban infrastructure.
  - Reprioritize limited fiscal resources toward human capital—education, health, and R&D—alongside physical infrastructure.
- Supporting analysis and outcomes
  - India averaged "roughly 7 percent annual real GDP growth" in the postpandemic era and anchored consumer price inflation near the "5 percent mark."
  - Banking-sector recovery: gross nonperforming assets fell from "more than 11 percent" to "less than 3 percent."
  - Corporate leverage dropped significantly, restoring profitability.
  - Final assessment: India has shown rapid growth can coexist with macro stability; the next phase is ensuring growth is structurally deep, inclusive, and innovation-driven.

*Content summarized from the IMF Finance & Development material in the supplied PDF content.*

### 4.5 percent annually, among the fastest

### 4.5 percent annually, among the fastest

### Growth, investment, and FDI
- ASEAN grew at "4.5 percent annually, among the fastest growth rates globally."
- Foreign investment reached "$244 billion in 2025, climbing 10 percent."
- Manufacturing investment "jumped by nearly 50 percent."
- "ASEAN’s share of global FDI inflows has tripled since 2005."
- "ASEAN’s share of world goods exports has nearly caught up to the United States, even as China’s share has more than doubled."

### Trade patterns and internal market integration
- Only "about 22 percent of what ASEAN exports goes to its own members," compared with "61 percent" within the European Union.
- "What does cross internal borders is mostly intermediate goods, the parts and components feeding factories that sell to the rest of the world."
- "ASEAN has built a shared production line, but not a shared market."
- "Less than 30 percent of final goods exports is traded within the region, half the share in Europe and North America."
- ASEAN is described as "highly open to global trade, with volumes exceeding its economic output," yet "trade within ASEAN accounts for less than a quarter of total trade—far below other regional blocs."

### Potential gains from deeper regional integration
- IMF estimates show that "dismantling the region’s nontariff barriers could raise ASEAN’s output by 4.3 percent over the long run, equivalent to adding over a third of Malaysia’s economy."
- "Gains reflect long-run real GDP under lower regional nontariff barriers."
- Chart descriptors: "cumulative rise in real GDP for ASEAN over the long run from deeper regional integration 4.3%."
- The text emphasizes that "No region in Asia has more to gain from deeper integration."

### Structural challenges constraining growth
- Productivity:
  - "Productivity gains are slowing, because industrialization pays fewer dividends."
  - "Productivity growth—the ultimate driver of sustained income gains—has slowed across much of Asia since the global financial crisis."
  - "While investment remains high, returns to capital have declined, reflecting rising misallocation and diminishing efficiency."
  - Financial systems "remain heavily bank-centric," favoring large incumbents including state-owned enterprises over younger, faster-growing firms.
- Demographics:
  - Since the 1960s, fertility rates fell "from about 6 children per woman to about 1.6 today."
  - Life expectancy rose "from roughly 50 years to the mid-70s."
  - "By 2050, one in five people in Asia will be 65 or older—double today’s share."
  - The region is "not aging uniformly," with rapidly aging economies (Japan, Korea, China), middle group (India, Malaysia, Vietnam), and younger economies (Nepal, the Philippines).
- Trade fragmentation and geoeconomic shifts:
  - "Geoeconomic fragmentation is reshaping trade patterns, supply chains, and investment flows."
  - Policy responses include "more active industrial policies," which the analysis warns may "distort incentives or further fragment markets."
- Energy and technology risks:
  - "High levels of energy intensity and dependence on energy imports add another layer of vulnerability."
  - "Artificial intelligence and other rapid technological advances ... also risk disrupting jobs and widening divides."

### Policy directions and priorities highlighted
- Trade and regional integration:
  - "Dismantling the region’s nontariff barriers" to raise output by "4.3 percent over the long run."
  - "More comprehensive, enforceable regional agreements—covering services, digital trade, competition policy, and standards—can lower trade costs and improve access, thereby boosting productivity."
  - Build a "deeper home market" to reduce exposure to outside demand shocks.
- Finance and investment allocation:
  - "Sustaining growth will require shifting from more to better investment and strengthening financial systems so that capital flows to its most productive uses."
  - "Asia can pivot toward boosting productivity rather than capital accumulation by improving financial access, deepening capital markets, and expanding venture finance."
  - "Capital flows to more productive recipients when it’s priced and allocated on market terms."
- Labor, skills, and demographics:
  - Raise "labor participation among women and older people."
  - Invest in "skills" and facilitate mobility.
  - "Migration, both within and across borders, can also help if well managed."
- Technological adaptation and inclusion:
  - Leverage "AI and other technologies" to offset labor shortages in aging economies while managing distributional risks to avoid widening divides.

*Sources: UNCTAD, Foreign Direct Investment database; IMF, International Trade in Goods database; ASEANstats; Eurostat; World Bank; and author’s and IMF staff calculations.*

### 1.8 percent in the long run—equivalent to adding

### fd-sept26-online - 1.8 percent in the long run—equivalent to adding

### Growth gains from deeper regional integration
- Real GDP gains from deepening regional integration: Chart 3 highlights that Southeast Asia stands to gain the most among subregions; the headline long-run figure cited is "1.8 percent in the long run—equivalent to adding an economy larger than Thailand’s today."
- Additional gains from coordinated reforms would be larger than unilateral action.
- Trade integration could lift growth further by about 0.1 to 0.3 percentage point.

### Demographic shift and heterogeneity across Asia
- Asia’s economies are at different demographic stages and face different trade-offs.
- Working-age defined as 15–64; dividend stages reflect the path of the working-age population and its share of the total.
- A shrinking population is expected to subtract about 0.3 percentage point from growth annually by 2050.

### Technology, AI, and digitalization as growth drivers
- Asia already leads in digital adoption: about 90 percent of the population online.
- Asia accounts for more than two-thirds of global innovation in digital technologies.
- AI potential: in economies with strong fundamentals, AI could raise growth by up to 1 percentage point per year relative to a no-AI baseline (model-based analysis).
- Productivity gains from AI and related technologies could add 0.2 to 1 percentage point to growth.
- Digitalization complements reforms by increasing the efficiency of financial transactions and by digitalizing tax and payment systems, which can raise government revenues and improve public spending transparency.
- India example: modern services account for about a quarter of exports; digital payments move trillions of dollars each year.

### Distributional and labor-market implications of AI
- Benefits of AI are unlikely to be evenly distributed: early adopters with higher-skilled workers, greater capital intensity, and better institutional capacity stand to gain most.
- Within countries, AI may intensify wage and opportunity gaps: high-skilled workers in complementary roles may see wage gains while others may be displaced.
- Policy responses highlighted: investment in education, digital infrastructure, innovation; labor policies such as retraining and support for worker mobility; redistributive policies to share AI gains and support displaced workers.

### Energy security and near-term macroeconomic risks
- Energy security is now a near-term macroeconomic challenge, especially in Southeast Asia.
- Continued reliance on imported fossil fuels collides with rapidly rising energy demand (cited drivers: Vietnam’s industrial expansion, Singapore’s data centers, Indonesia’s urbanization).
- Countries are pivoting: Vietnam scaling up renewables; Indonesia exploring a shift away from coal; the Philippines diversifying away from imported energy; Thailand making the energy transition a policy priority.
- Falling renewables costs and advances in storage ease the transition even as digitalization and AI raise electricity demand.
- Policy challenge: move fast without compromising affordability or reliability; payoff includes greater energy security and resilience.

### Structural transformation toward services and domestic demand
- In many economies, manufacturing has peaked as a share of output while services—particularly finance, information technology, and business process outsourcing—increasingly drive growth.
- Rebalancing toward domestic demand should be part of the broader shift toward balanced growth to support resilience amid a fragmented global economy.

### Fiscal and revenue considerations for reform implementation
- Unlocking the full potential of reforms calls for fiscal space to manage transition costs, offset revenue losses from tariff reductions, and support needed investment in complementing reforms.
- Tax revenue in much of Asia, notably in many ASEAN economies, is low relative to peers; raising more domestic revenue will be critical to finance investments needed for deeper regional integration and sustained growth.

### Policy recommendations and priorities
- Sustain growth through policies that ensure a continued shift toward productivity, inclusion, and sustainability: strengthen skills, institutions, and technology use.
- Create fiscal space to manage transition costs and finance complementary investments.
- Invest in digital infrastructure, build digital platforms (identity and payment systems), strengthen regulation to ensure trust, and expand digital literacy.
- Design labor policies for retraining and worker mobility; implement redistributive policies to share gains and protect displaced workers.
- Accelerate renewables and storage deployment while safeguarding affordability and reliability.
- Coordinate reforms across countries where possible to magnify gains from integration.

### Key statistics and figures preserved from the source
- "1.8 percent in the long run—equivalent to adding an economy larger than Thailand’s today."
- Working-age = 15–64.
- About 90 percent of the population online (Asia).
- Asia accounts for more than two-thirds of global innovation in digital technologies.
- AI could raise growth by up to 1 percentage point per year relative to a no-AI baseline (in better-prepared economies such as Japan and Korea).
- Shrinking population expected to subtract about 0.3 percentage point from growth annually by 2050.
- Productivity gains from AI and related technologies could add 0.2 to 1 percentage point.
- Additional gains from trade integration could lift growth by about 0.1 to 0.3 percentage point.
- Intra-ASEAN trade amounts to 25 percent of GDP; trade with the rest of the world fluctuates between 80 and 90 percent (as noted in the regional context).

*Source: fd-sept26-online - 1.8 percent in the long run—equivalent to adding*

### 18.7 percent in 2019 to 22.3 percent in 2025; electric

### fd-sept26-online - 18.7 percent in 2019 to 22.3 percent in 2025; electric

### China’s trade surplus, industrial upgrading, and external recycling
- China’s trade share rose from 18.7 percent in 2019 to 22.3 percent in 2025; electric vehicles, batteries, solar products, and chemicals accounted for about 70 percent of that increase.
- Some of the shift reflects China’s upgrading; some reflects conditions in Europe: higher energy costs weakened chemical and other energy-intensive industries, while the green transition raised demand for equipment that China could supply on a large scale.
- Trade outcomes reflect, at least in part, what other economies can or cannot produce competitively.
- On recycling the surplus:
  - Historically much surplus was invested in US Treasurys and other dollar assets.
  - Increasingly surplus savings are being invested in factories and infrastructure abroad, creating jobs, strengthening local supply chains, and supporting industrial upgrades.
  - Examples cited in 2025: Alibaba Cloud opened a third data center in Malaysia; BYD moved ahead with its first European passenger car plant in Hungary; Haier-owned GE Appliances announced a $3 billion expansion of its US manufacturing footprint.
- Geopolitical backlash: Policymakers cannot ignore tariffs and other restrictions that China’s growing surplus has provoked among trading partners; success poses risks to China’s growth model.

### Rebalancing at home: the third transition and macro policy
- Argument: External recycling can ease pressure but cannot substitute for rebalancing at home toward higher household incomes and services-led consumption.
- Risks of failing to rebalance:
  - China’s transformation could become increasingly K-shaped: richer households capturing larger shares of wealth than poorer ones.
  - The digital transition and AI can raise productivity but may deepen income inequality and labor displacement if gains outpace job and wage growth.
  - If productivity gains do not translate into stronger household incomes and consumption, more output must be absorbed abroad, widening the external surplus as trading partners become less willing to accommodate it.
- Key domestic statistics and comparisons:
  - In 2025, China’s automobile industry generated more than RMB 11 trillion—exceeding property sales, which fell to about RMB 8 trillion from RMB 18 trillion in 2021.
  - Automobile manufacturing contributed only about 1.6 percent of GDP, far less than real estate’s 6 percent.
  - Household consumption rose from about 35 percent of GDP in 2010 to 40 percent in 2024, still well below the 53 percent average for middle-income countries.
- Policy measures recommended:
  - Stronger social protection and public services: higher spending on pensions, health care, childcare, education, and unemployment insurance to reduce precautionary saving and make consumption a more reliable source of demand.
  - Repair balance sheets to reduce the debt overhang: debt restructuring, especially at the level of local governments and firms across the property value chain, to restore credit availability.
  - More productive investment abroad to recycle surplus into job-creating foreign factories and infrastructure.

### China’s deeper reform proposition
- China’s advantages in demand and supply position it well for a transition driven by green and digital technologies; these revolutions reward high volume and resilience amid geopolitical fragmentation.
- The article attributes China’s record trade surplus more to industrial advantages than to subsidies.
- Deeper reform is needed to sustain the transition and the surplus through:
  - Stronger household incomes.
  - Better social protection.
  - More services consumption.
  - More productive investment abroad.
- If China can match industrial upgrading with domestic rebalancing, the benefits will extend beyond its borders: a more durable Chinese economy and a more reliable supply of affordable technologies.

### India: From Goldilocks narrative to structural constraints
- Context: A year earlier India enjoyed robust growth, benign inflation, modest current account deficit, healthier bank and corporate balance sheets, and had become the world’s fifth-largest economy; the China+1 tailwind supported optimism.
- Headwinds in 2025: a steep rise in oil prices triggered by conflict in the Middle East exposed structural energy vulnerabilities; growth momentum cooled, inflationary pressures reemerged, the rupee faced persistent downward pressure, capital outflows weakened the external sector, private investment remained stalled, and India slipped to sixth place in the global GDP ranking.
- The core question: Are recent setbacks temporary external shocks or signs that India’s Goldilocks moment was built on a shallower foundation?

### India’s three structural vulnerabilities
- Missing private investment:
  - India’s overall investment rate has hovered around 33 percent of GDP.
  - Private corporate investment remains stuck at about 11 percent of GDP, far below its historical peak of nearly 17 percent in 2008.
  - Public capital expenditure has driven much of recent growth while private investment lags.
  - Investment concentration: a handful of large business groups, renewable energy projects, telecommunications services, data centers, electronics assembly, and sectors with government incentives have attracted capital; medium-sized manufacturing firms remain hesitant.
  - Causes: uncertainty about future demand and expected returns; regulatory friction and unpredictable policy shifts; compliance complexities; uneven playing field.
- Jobs and productivity mismatch:
  - Agriculture contributes just about 15 percent of GDP but accounts for nearly half the total workforce.
  - Manufacturing is responsible for about 13 percent of GDP and absorbs only about 11 percent of workers.
  - The high-value modern sector (information technology, finance, business services) generates roughly 15 percent of GDP while directly employing a minuscule 3 percent of the workforce.
  - Result: a massive productivity gap between agriculture and the rest of the economy, limiting large-scale creation of formal, high-quality jobs.
  - Potential: manufacturing remains the primary sector capable of absorbing labor at scale; India imports over $100 billion in annual goods from China—partial substitution could generate millions of jobs if firms can scale and integrate into global value chains.
- Fragmented market and K-shaped outcomes:
  - Growth concentrated in capital- and skill-intensive sectors has resulted in uneven distribution of wealth.
  - Over 85 percent of the workforce is in informal employment, lacking social security benefits or predictable income.
  - Real rural wage growth has remained flat or negative when adjusted for persistent food inflation.
  - The consumer market is fragmented: premium goods demand outpaces entry-level mass-market staples, capping domestic market size and constraining long-term momentum.
- Innovation deficit:
  - India’s total spending on R&D remains stuck at roughly 0.7 percent of GDP, whereas advanced innovation economies routinely spend 3 percent of GDP or more.
  - India is a prolific user of frontier technology but a marginal producer of core intellectual property in semiconductors, artificial intelligence, biotech, and advanced manufacturing.
  - Demographics: median age roughly 28 (compared with nearly 40 in China and over 44 in Europe); the demographic dividend is not automatic and requires investment in education and upskilling.

### Policy priorities for India
- Three priorities to structurally translate growth into sustained inclusive development:
  - Revive private investment by creating a more predictable regulatory environment, lowering compliance burdens, and raising expectations for returns on long-term capital.
  - Accelerate the shift of labor from low-productivity agriculture to labor-intensive manufacturing and modern services through investment in skills, logistics, and urban infrastructure.
  - Reprioritize limited fiscal resources toward human capital—education, health, and R&D—alongside physical infrastructure.
- Supporting analysis:
  - The article notes India averaged roughly 7 percent annual real GDP growth in the postpandemic era and anchored consumer price inflation near the 5 percent mark.
  - Banking-sector recovery: gross nonperforming assets fell from a peak of more than 11 percent to a multiyear low of less than 3 percent.
  - Corporate leverage dropped significantly, restoring profitability.
- Final assessment: India has shown that rapid growth can coexist with macroeconomic stability; the next phase is ensuring growth is structurally deep, inclusive, and innovation-driven.

*Italic: Content summarized from the IMF Finance & Development material in the supplied PDF content.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2026/09/fd-sept26-online.pdf_